The federal student loan process is designed to be easy. There’s no need to shop around, compare terms or apply with multiple lenders when you take out a federal loan.
But choosing a private student loan is a little more complicated. Your repayment terms could look significantly different depending on which lender you choose! That’s why it’s important to do your homework beforehand.
Here are some of the factors you should consider when choosing a private student lender, and how to decide which options are best suited for you.
How to Compare Private Student Loan Lenders
Before finalizing a private student loan, view rates and terms from multiple lenders to find the best offer. Consider the following factors when choosing a private lender.
Interest Rates and Fees
One of the most important factors when comparing private student loan lenders is the interest rate. The interest rate affects your monthly payments and the total interest paid over the life of the loan.
Most lenders will show a range of interest rates on their website, but the final rate will depend on your credit score, income, total loan amount, additional debt, and whether or not you have a cosigner. You will have to submit a formal application to see what rate you qualify for.
Fixed or Variable
Most private lenders offer fixed-rate and variable-rate student loans. The interest rate on a fixed-rate loan will remain the same throughout the entire loan term, while the interest rate on a variable-rate loan may swing back and forth between a predetermined range.
The starting point on a variable-rate loan is usually lower than the interest rate on a fixed-rate loan, but interest rates on variable-rate loans almost always increase over time. If you’re considering a variable-rate loan, ask the lender what your highest possible monthly payment will be and determine if you can afford that amount.
Ask each lender how much they charge for origination, prepayment, and late fees, then compare the responses. Don’t assume that every lender has the same policy. For example, Discover does not charge any late fees on its student loans, but most lenders do.
Terms for private student loans usually range from five to 20 years and generally come in five-year increments.
Choosing a term is one of the most crucial decisions. The loan term can affect the interest rate, monthly payment and total interest paid. Longer loan terms often have higher interest rates and lower monthly payments, while shorter terms have lower interest rates and higher monthly payments.
Each lender sets its own limit of how much it will loan to students. For example, Rhode Island Student Loan Authority (RISLA) has a $150,000 total loan limit per borrower, while College Ave will lend up to the cost of attendance minus any other financial aid.
The maximum loan amount offered may also depend on your credit score, income, if you have a cosigner, and your projected income after graduation.
Customer Service Reviews
Before choosing a lender, read reviews from both current and former customers on sites like Trustpilot, Reddit, Better Business Bureau, and Google. Ask people you know with private student loans what their experience has been with their particular lender.
The grace period refers to a time when payments are not due, either after graduation or after dropping below part-time status. Private lenders are not required to offer grace periods, but some will. Lenders that don’t offer a grace period may require that payments begin as soon as you’re no longer in school.
When you compare lenders, ask about their grace period policy and if interest will continue to accrue during that time.
Many private lenders provide forbearance programs to borrowers who are struggling to make payments, but the length of the forbearance period can vary widely. Like a grace period, the forbearance period means you won’t owe regular payments, but your loans will still be in good standing.
The length of a forbearance period for private student loans can range from one to 12 months. Before finalizing a loan, understand how the lender’s forbearance program works. Some lenders require that you meet some kind of financial hardship to qualify for forbearance, like being unemployed or furloughed.
Lenders may also charge a small fee to enroll in a forbearance program. Some companies will still require a small monthly payment, like $25, during forbearance, while others won’t charge anything.
Almost all private student loan companies require a cosigner, who will become legally responsible for the loan if the original borrower stops making payments or defaults. The cosigner can be any adult but is most often a parent or guardian.
The cosigner must meet the lender’s credit score and income standards to be eligible. The loan will appear on the cosigner’s credit report and may harm their credit score if you make late payments or default on the loan.
Private student loan companies require a cosigner because most students don’t have a strong credit history or stable income. If you do need a cosigner, find a lender that offers cosigner release, which allows you to remove the cosigner from a loan after you’ve made a certain number of payments without having to refinance.
There are two private lenders, Funding U and Ascent, that don’t require a cosigner, but they may offer lower loan limits, charge higher interest rates, or have more stringent requirements.
Alternatives to Private Student Loans
Make sure you’ve maxed out federal student loans before you apply for a private loan. Federal loans have more repayment, loan forgiveness, and deferment options than private loans, along with lower interest rates on average.
If you’ve maxed out your federal student loans, your parents can borrow a federal Parent PLUS loan to pay for the remainder. The loan will be in the parent’s name, but they will be eligible for similar income-driven and forgiveness options as regular federal student loans.